Easy Come, Easy Go

Volume VI, Number 10 October 4, 2000

This presidential debates are underscoring important differences in the
candidates' budget plans. The public, however, may be missing a fundamental similarity.
Both candidates assume that we've entered an era of guaranteed fiscal plenty in which the
only hard choice is how to divvy up a large and growing surplus.
This premise is mistaken. If the projections turn out to be even slightly optimistic, the
spending hikes and tax cuts the candidates propose could return the budget to trust-fund
squandering and deficit-financing within a few years. As the election approaches--and the
campaign promises accumulate--it's worth recalling just how fragile today's surplus
projections really are.

A Few Minor Changes

Let's start with the official numbers. The CBO now projects a unified
budget surplus of $4.6 trillion for FY 2001-2010--$1.5 trillion more than it was
projecting as recently as January 2000. Much of this surplus ($2.4 trillion) is accounted
for by the Social Security trust-fund surplus, which both of the candidates agree should
be off limits. But that still leaves an "on-budget" balance of $2.2 trillion
over the next ten years.
Of this balance, Vice President Gore proposes spending $1.4 trillion, mostly on spending
hikes, while Governor Bush proposes spending $1.9 trillion, mostly on tax cuts. The actual
numbers could be much higher. Many experts believe that Gore is greatly underestimating
the cost of his Medicare drug benefit and his "Retirement Savings Plus"
accounts--in the first case by assuming unrealistically low drug costs, in the second by
assuming unrealistically low participation rates. For his part, Bush is banking on a
couple hundred billion in unspecified savings from government "reform."
But even if the cost estimates are right, there's still a problem: The projected surpluses
the candidates are counting on could vanish as suddenly as they appeared. It wouldn't take
a major war or major recession to erase them. All that's required are a few minor and
entirely unremarkable changes in underlying budget trends.
Imagine the following scenario. On the outlay side, discretionary spending keeps pace with
the growth of the economy, rather than withering away as a share of GDP as it does in the
CBO baseline. Meanwhile, spending on Medicare and Medicaid grows 1 percent faster than
anticipated--at 8 percent per year instead of 7 percent. On the revenue side, real GDP,
and hence real income, grows half a percentage point slower than anticipated, due to some
combination of lower productivity growth and lower labor force growth. At the same time,
the share of GDP collected in taxes falls halfway back to what it was five years ago.
Possible reasons include a decline in capital gains and a reversal in the recent trend
toward greater income inequality.
The result? The changes in assumptions not only wipe out the entire projected on-budget
surplus, they would, by the end of the decade, wipe out virtually the entire unified
budget surplus as well. The unified surplus, now expected to grow to $685 billion by 2010,
would instead shrink to $31 billion. And even this assumes that there will be no tax cuts
and no new spending programs. Under either of the candidates' plans, the changes would
plunge the budget deep into deficit.
The candidates claim to allow for adverse developments. Gore in particular stresses that
his plan is "fiscally prudent" because it sets up a "reserve fund" of
$300 billion. But this fund amounts to a mere hiccup in the projections. The scenario
outlined above erases not $300 billion of the ten-year surplus, but $3.5 trillion.

The Same Basic Choices

The truth is that America now faces the same basic fiscal choices it faced
five years ago. Today's prosperity has neither repealed the age wave nor forestalled the
coming explosion in senior benefits. Back when the budget was in deficit, leaders used to
say that confronting the long-term challenge was too painful. Today, with the budget in
surplus, at least for the moment, they act as if it's no longer necessary. It's time the
American public demanded more candor and courage.